Cornwall Insight Explainer: Renewable Obligation Mutualisation

Ofgem confirmed on 7 November that mutualisation for the Renewables Obligation (RO) had been triggered for 2018-19 – Compliance Period (CP) 17 – the second consecutive year this has happened. The initial shortfall in buy-out payments was £206.0mn, more than double last year’s level, against a total amount owed of £943.5mn.

Tim Dixon Team Lead at Cornwall Insight takes a look at how RO Mutualisation will affect key stakeholders in the industry.

Will mutualisation reach the full £206mn?

“While it is highly unlikely that the mutualisation amount will reach £206mn, it is probable that it will exceed the £58.6mn shortfall seen in CP16 (2017-18). This is because 15 suppliers with volumes in CP17 have had their supply licences revoked. Cornwall Insight estimates this amount to be more than £60mn; any additional shortfall will depend on further suppliers not making late payments.”

What does this mean for the generator?

“Mutualisation will defer some of the payments that RO generators were expecting in the coming years. £6.8/Roc has already been redistributed from buy-out payments, but an additional amount will be redistributed by 1 January 2020 from late payments. This late payment recycle could range between ~£1.4/Roc in a scenario where just £60mn is unpaid, or £0.0/Roc if all £206mn is unpaid, although this is highly unlikely.”

“Any money not paid by the late payment deadline will be deferred to mutualisation. Payments paid by suppliers will be redistributed in four equal quarterly payments, starting 1 November 2021.”

What does this mean for the supplier?

“The rest of the supply market will now need to recover any shortfall in late payments. These payments will be recovered via four quarterly instalments, starting on 1 September 2020.”

“A £60mn mutualisation amount would equate to a cost of ~£0.21 for every MWh they supplied in 2018-19. In the highly unlikely event that the £206mn was mutualised, it would equate to ~£0.73 for every MWh supplied in CP17.”

What does this mean for the customer?

“Ultimately, these costs get passed through to customers. Cornwall Insight estimates that a £60mn mutualisation amount will cost customers an extra ~70p on a households electric bill.”